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US GDP - better than the headline figure suggests

US GDP - better than the headline figure suggests

US GDP slowed sharply in the first quarter, but the underlying growth picture remained solid. The US economy grew by just 0.7% (quarter-on-quarter annualised) in the first three months of the year.

This is a marked reduction from the 2.1% pace recorded in the previous quarter and slightly below expectations of a 1% rise.

Breakdown shows a mixed picture

The breakdown shows that household consumption barely grew as spending on durable goods dropped whilst inventories fell back to take nearly 1% off GDP growth.

On the positive side we saw strong gains in fixed investment while exports rebounded from a weak fourth quarter. Stripping out the volatile inventory component shows that final sales actually picked up to a 1.6% pace in the first quarter from 1.1% at the end of last year.

Seasonal adjustments may be faulty

These are still relatively soft numbers so do not entirely dispel the notion that the economy is losing momentum.

However, in our view there is ongoing evidence of faulty seasonal adjustment. On our analysis, the official numbers tend to understate growth in the first quarter of each year and on this adjustment growth was 2.4% annualised rather than 0.7%.

The same conclusion follows if we simply look at year-on-year numbers, which came in at 1.9%, barely different from the 2% for the fourth quarter of 2016.

Watch out for inflation

Where we might have more cause for concern is on the inflation side where we saw a rise in the GDP price deflator to 2.3% from 2.1% at the end of last year. Not too alarming but in the separate employment cost index report, released at the same time, we also saw a stronger-than-expected rise of 0.8%, taking the year-on-year rate up to 2.4%. These may be the first signs that the US is showing some late cycle inflation.